IMANI: Ghana makes modest gains in economic freedom but…
The following is a report by Ghanaian think tank, IMANI Ghana, on gains it says the Ghanaian economy has made.
IMANI Desk Report: Ghana makes modest gains in economic freedom but trails in Global Economic Competitiveness.
Global Economic Freedom Indices.
Global progress and development is a function of a number of factors. Some of these factors are established theoretical frameworks, while others are the results of empirical studies carried out on the subject of development and growth. There have been cases where theoretical frameworks have conflicted with the proposition and results arrived at by empirical studies. Despite this conflict, an overarching guideline that both approaches have employed, has been the study of historical data and antecedents, in understanding the dynamics of development confronting all countries globally.
Scholars in institutions of higher learning the world over have designed methods for measuring the economic development of countries using some aggregated metrics or indices, notable of which include; the Fraser Institute’s Economic Freedom of the World Index, the International Property Rights Index by the Property Rights Alliance, the Heritage Foundations’ Economic Freedom Index, and the Global Competitive Index Report by the World Economic Forum.
The Economic Freedom of the World (EFW) team, made up of scholars, in development related subjects, have since 1996 developed a system for measuring the extent to which economies, the world over, are free, and most importantly how this translates into development. The model uses over 42 indicators which summarily can be categorized as; size of government, legal systems and property rights, soundness of money, freedom to trade and openness to international markets, and regulation of economies and markets. These thematic areas EFW has established are very key in identifying why some countries, and regions are developed, why others are not developed and ultimately account for progress in global development or otherwise. Methods used by EFW, are very comprehensive as it bridges the theory versus empirical studies gap mentioned above. Thus the Report presents at best a good reflection just as the other indices mentioned in this short report, of the extent to which countries pursue economic freedom and how this translates into economic growth and development, highlighting areas that needs strengthening and improvement.
In the 16th Edition of their (Economic Freedom of the World Team) report, data relating to 2010, aggregated economic freedom of the world Africa ranked 7th out 7 continents, as the region with least Economic Freedoms assessed using the five thematic areas mentioned above. See table 1 below
It could be observed that, the patterns of development is actually a reflection of these statistics. Disaggregating these into the results obtained by various countries, the giants of Europe and North America actually do lead in economic freedoms as the aggregated information will suggest.
Ghana’s Mixed Performance
Ghana has had its fair share of post-independence freedom (economic, political, legal, property rights,) issues, which at any point in time was a reflection of the state of affairs in the country. As one of the countries to have enjoyed relative political stability over the past two decades in Africa, we are acclaimed to be in some cases the economic gateway to West Africa. But as established in the preceding paragraph, an economic hub in Africa must be characterised by its ability to compete effectively if not on the global stage, at least within the sub-region. The 2010 report on the Economic Freedoms of the World posits that, countries with economic freedoms outperform those without economic freedoms, which will mean that, one will have to situate the position of Ghana in the rankings in order to explain our economic progress in relation to other countries and to make future projections going forward.
It is observable from Table 2 above that there has been an incremental trend from 1980 up until 2009 on the state of economic freedoms measured in terms of size of government, legal systems and property rights, soundness of money, freedom to trade and openness to international markets, and regulation of economies and markets. This is an actual reflection of our economic history as the period from 1980’s to the early 1990’s was characterised by military rule which inhibited the economic freedoms, and undermined the five essential areas highlighted above. This however changed from thence up until 2009, the country sees some institutional changes, including decentralization, trade liberalization, openness of the Ghanaian market to foreign trade, private property protection among others. These accounted for the increase in the overall ratings obtained under the EFW, and in fact showed a return to a more stable economic environment from the early 90’s to the late 2000’s (40.11% improvement in the ranking). Consequently, Ghana over this period became the economic hub for investment in Africa, as investors both international and local had confidence in the economic and political stability of the country compared to its neighbours within the sub-region.
The report (Economic Freedoms of the World) showed a decline in the country’s rating from an aggregated 7.13 in 2009 to 7.09 in the latest ranking implying that economic freedoms have declined in Ghana. An investigation of the disaggregated variables further reveal, the size of the government expanded as government spending increased, within the period from 7.65 to 8.28 out of the best of 10 with 10 being the highest, legal systems and property rights increased from 5.45 to 5.58 albeit its essential component of protection of property rights decreasing from 5.34 to 5.03, and regulatory restrictions on private property sale increasing from 9.03 to 9.13. Over the same period, there was a huge decline in soundness of money from 8.16 to 7.13 which was caused by a decline in money growth, and an over fifty percent decrease in freedom to own foreign bank accounts. The other two indicators (regulation and freedom to international trade, marginally increased). Given these for context, the adverse effects of decline in private property protection, and soundness of money were significant to have turned the cumulative gains made by the country over the past three decades around. Truly we have seen deliberate attempts by Bank of Ghana to control the acquisition of foreign currency as a mechanism to protect the local currency and any adverse effects on other macro-economic indicators such as inflation and interest rates, an increase in the cost of doing business as businesses and private sector investors lamented their challenges over the 2009 to 2010 period, and an attempt by monetary policy to target a single digit inflation over the same period. These “dirigiste” measures generally accounted for the decline in the country’s rating and subsequently on private economic gains.
Property Rights Protection
To further investigate the decline in private property protection, we will have to resort to another index, the International Property Rights Index (IPRI) developed by the Property Rights Alliance, a Washington DC based think tank, which ranks 131 countries accounting for 98% of the world’s GDP and 93% of the world population. The IPRI highlights the economic disparities of countries with strong property rights and those without. Nations in the top 25% such as Finland, Australia, and the United States enjoy an average national GDP per capita of $38,288 while nations in the second quintile, such as Ireland, Chile, and South Africa have an average GDP per capita of $26,680.
From 2009 to 2013, the overall IPRI score for Ghana decreased by 0.4%. However, from 2012 to 2013 there was no variation in the IPRI score . Intellectual Property Rights remained stable at 5.6. The Physical Property Rights component score decreased by 0.1 points from 2012 to 2013. This decline is due, in part, to a decline in the Protection of Physical Property Rights. Furthermore, the component Legal and Political Environment increased by 0.1 points between 2012 and 2013. The improvement is because of increases in both political stability and relative control of corruption. We see the decline in physical private property rights protection being confirmed again confirmed by this index from 2009.
The Heritage Index for Economic Freedom, published by the Wall Street Journal and the Heritage Foundation in Washington DC, observed similar trends in economic freedom as did the Economic Freedom of the World by the Fraser Institute, and the International Property Rights Index by the Property Rights Alliance (PRA). According to this Index (considers, rule of law, open markets, regulatory efficiency and limited government as broad categories), Ghana appeared as one of the “moderately free” countries ranking 77 with a score of 61.3 of 100 behind Slovenia globally. According to the index, regulatory efficiency declined in 2013, as all its three major components; business freedom, labour freedom, and monetary freedom declined to 61.5, 61.6, and 64.8 out of 100 respectively. It highlighted that the judicial system was still susceptible to political influences and corruption. This resulted in a decline of the rule of law component of the overall index. There was an increase in the open markets “department” which nuanced from stable trade and financial freedom, and an increase in investment freedom, as according to the index the “state does not discriminate against foreign investors, except in key areas”. It further asserted that the investment environment lacked efficiency and transparency.
The Global Competitive Index Fails Ghana. Places 114 out of 144 countries ranked in 2013. Same Position in 2011.
The ultimate analysis will be to identify how Ghana as a country has been able to position herself to compete in the global market, over the past years, given the benefits of growth and development emanating from economic freedom. The Global Competitive Index (GCI) by the World Economic Forum (WEF) provides the accurate reference point for the determination of the extent to which Ghana has been competitive as an economy within the Global economic space.
Employing over 100 socio-economic indicators, it is the most comprehensive assessment tool available for such an analysis of this kind. Ghana placed 114, out of 144 countries ranked by the index in 2013, scoring 3.7 on a scoring scale of 7 maximum. The index further reports the trend as Ghana slipping from its initial position of 103 for the 2012 ranking. In 2011, the situation was even worse with the country placing 114 out of 142 countries ranked globally. The basic pre-requisites for competing globally saw Ghana place 128 out of 144 countries. For adequate institutions, Ghana placed 70 in the ranking, which “woefully” came last in the index for macro-economic environment.
Some of the experiences below may have helped Ghana slip several places down the GCI ladder. Over the past few years some companies such as PZ Cussons and British American Tobacco have closed down their manufacturing plants and moved to Nigeria, choosing to import all their finished goods into Ghana. Samsung threatened to leave Ghana a couple of months ago. Virgin Atlantic closed shop in Ghana on September 23, 2013 citing high fuel costs and unfulfilled expectations re business class clients. Those who believe a change is in the distant offing have their fate sealed; taking extremely risky measures to survive in order to not lay poor Ghanaian workers off. One factory buys a hundred (100) Tanker loads of water every day, just to keep working.
Throw into the mix, a falling cedi, energy poverty, high fuel costs, unannounced increases in taxes, a multitude of levies and fees, a stifling bureaucracy, and high handedness of some municipal authorities, grid lock, unfair and corrupt practices at our ports regarding duties and brazen demand for bribes, unreliable and largely unavailable rail system, deteriorating roads, re-registration of foreigners (in spite of multiple identities they have acquired), questionable social security extraction from short-term foreign contractors, and you have all it takes to weigh down a country’s economic competitiveness and sidestep development.
Despite the gains that the country has made in areas of economic freedom and institutional adequacy, the country has the worst macro-economic environment of the 144 countries, with the likes of Cameroun and Mauritius performing better. Generally the report ranks Ghana as a factor driven economy even though Ghana outperformed the factor driven economies in innovation, business sophistication, market size, technological readiness, financial market development, goods market efficiency, and higher education and training, except macro-economic environment where it came last. This could only mean that the country has an efficient and innovative market space, but macro-economic policies are not supportive of this advantage. Consequently it is not incongruous that the country slipped on the overall ranking by the World Economic Form in 2013. This validates the decline in economic freedoms as identified by the IPRI and EFW indices.
Going forward, what does this mean for the future?
It is quite obvious; the relationship between economic growth/development and economic freedoms. In reality, we see the economically free regions showing high economic freedom indicators. Table 3 provides more specifics in relation to countries with high ranking on the EFW index.
These countries have also seen increases in standard of living and life expectancy rates. Consequently there is information to suggest that economically free nations are more stable in pursuit of growth and development.
As the historical trends will show, Ghana in its attempt to build a robust economy focused on strengthening its legal structures, decreasing the size of government, protecting private property and civil liberties. Has this improvement in economic freedoms translated into growth over the years? This is seldom the case as a year on year comparison will show that the Ghanaian economy has improved marginally. The country has not been able to achieve its predetermined growth rates on a year on year basis even though some increases can be observed. Performance in institutional adequacy, relative infrastructural development, improvement in education, among others will amount to nothing if the macro-economic environment is not “friendly” to support private businesses and consequently result in wealth creation and protection. Thus, in order for the country to fully realize the benefits that come with its economic freedoms, it must look carefully at its institutions that catalyse economic growth, pursue progressive macro-economic policies (exchange rate, inflation rates, interest rates etc.), because the improvement in economic freedoms must be complemented by a deliberate attempt to leverage on institutional capacity to spur growth and become truly competitive globally.
As there is ample evidence beyond the Fraser Institutes report (Economic Freedoms of the World) to suggest that the strength of a country’s institutions towards the protection of private properties, and ensuring a freer economic environment is a necessary condition, one can only look into the economic future of Ghana “anxiously”, in the wake of relatively modest but not ambitious path to true economic freedoms. Copy a pdf version of the report here.